CH 11

Chapter 11: Project Risk Management
Information Technology Project Management, Fourth Edition
Learning Objectives
Understand what risk is and the importance of good project risk management. Discuss the elements involved in risk management planning and the contents of a risk management plan. List common sources of risks in information technology projects.
Learning Objectives (contd)

Describe the risk identification process, tools, and techniques to help identify project risks, and the main output of risk identification, a risk register. Discuss the qualitative risk analysis process and explain how to calculate risk factors, create probability/impact matrixes, apply the Top Ten Risk Item Tracking technique, and use expert judgment to rank risks.
Learning Objectives (contd)

Explain the quantitative risk analysis process and how to apply decision trees, simulation, and sensitivity analysis to quantify risks. Provide examples of using different risk response planning strategies to address both negative and positive risks. Discuss what is involved in risk monitoring and control.
Describe how software can assist in project risk management.

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The Importance of Project Risk Management

Project risk management is the art and science of identifying, analyzing, and responding to risk throughout the life of a project and in the best interests of meeting project objectives. Risk management is often overlooked in projects, but it can help improve project success by helping select good projects, determining project scope, and developing realistic estimates.
Research Shows Need to Improve Project Risk Management

Study by Ibbs and Kwak shows risk has the lowest maturity rating of all knowledge areas. KLCI study shows the benefits of following good software risk management practices. KPMG study found that 55 percent of runaway projectsprojects that have significant cost or schedule overrunsdid no risk management at all.*
*Cole, Andy, Runaway ProjectsCause and Effects, Software World, Vol. 26, no. 3, pp. 35 (1995).
Information Technology Project Management, Fourth Edition 6
Table 11-1. Project Management Maturity by Industry Group and Knowledge Area*
KEY: 1 = LOWEST MATURITY RATING
Engineering/ Construction
3.52 3.55 3.74
5 = HIGHEST MATURITY RATING

Information Systems
3.25 3.03 3.20
Telecommunications
3.45 3.41 3.22
Knowledge Area Scope Time Cost
Hi-Tech Manufacturing
3.37 3.50 3.97
Quality
Human Resources Communications Risk Procurement
2.91
3.18 3.53 2.93 3.33
3.22
3.20 3.53 2.87 3.01
2.88
2.93 3.21 2.75 2.91
3.26
3.18 3.48 2.76 3.33
*Ibbs, C. William and Young Hoon Kwak. Assessing Project Management Maturity, Project Management Journal (March 2000).
Figure 11-1. Benefits from Software Risk Management Practices*

100% 80% 80% 60% 60% 40% 20% 0% 47% 47% 43% 35% 6%
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*Kulik, Peter and Catherine Weber, Software Risk Management Practices 2001, KLCI Research Group (August 2001).
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Negative Risk
A dictionary definition of risk is the possibility of loss or injury. Negative risk involves understanding potential problems that might occur in the project and how they might impede project success. Negative risk management is like a form of insurance; it is an investment.
Risk Can Be Positive

Positive risks are risks that result in good things happening; sometimes called opportunities. A general definition of project risk is an uncertainty that can have a negative or positive effect on meeting project objectives. The goal of project risk management is to minimize potential negative risks while maximizing potential positive risks.
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Risk Utility
Risk utility or risk tolerance is the amount of satisfaction or pleasure received from a potential payoff.
Utility rises at a decreasing rate for people who are risk-averse.
Those who are risk-seeking have a higher tolerance for risk and their satisfaction increases when more payoff is at stake. The risk-neutral approach achieves a balance between risk and payoff.
Figure 11-2. Risk Utility Function and Risk Preference
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Project Risk Management Processes

Risk management planning: Deciding how to approach and plan the risk management activities for the project. Risk identification: Determining which risks are likely to affect a project and documenting the characteristics of each. Qualitative risk analysis: Prioritizing risks based on their probability and impact of occurrence.
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Project Risk Management Processes (contd)

Quantitative risk analysis: Numerically estimating the effects of risks on project objectives. Risk response planning: Taking steps to enhance opportunities and reduce threats to meeting project objectives. Risk monitoring and control: Monitoring identified and residual risks, identifying new risks, carrying out risk response plans, and evaluating the effectiveness of risk strategies throughout the life of the project.
Risk Management Planning

The main output of risk management planning is a risk management plana plan that documents the procedures for managing risk throughout a project. The project team should review project documents and understand the organizations and the sponsors approaches to risk. The level of detail will vary with the needs of the project.
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Table 11-2. Topics Addressed in a Risk Management Plan

Methodology
Roles and responsibilities Budget and schedule Risk categories Risk probability and impact Risk documentation
Contingency and Fallback Plans, Contingency Reserves

Contingency plans are predefined actions that the project team will take if an identified risk event occurs. Fallback plans are developed for risks that have a high impact on meeting project objectives, and are put into effect if attempts to reduce the risk are not effective. Contingency reserves or allowances are provisions held by the project sponsor or organization to reduce the risk of cost or schedule overruns to an acceptable level.
Common Sources of Risk in Information Technology Projects

Several studies show that IT projects share some common sources of risk. The Standish Group developed an IT success potential scoring sheet based on potential risks. Other broad categories of risk help identify potential risks.
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Table 11-3. Information Technology Success Potential Scoring Sheet

Success Criterion User Involvement Executive Management support Clear Statement of Requirements Proper Planning Realistic Expectations Smaller Project Milestones Competent Staff Ownership Clear Visions and Objectives Hard-Working, Focused Staff Total
Relative Importance 19 16 15 11 10 9 8 6 3 3 100

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Broad Categories of Risk

Market risk Financial risk Technology risk
People risk
Structure/process risk
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Risk Breakdown Structure

A risk breakdown structure is a hierarchy of potential risk categories for a project. Similar to a work breakdown structure but used to identify and categorize risks.
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Figure 11-3. Sample Risk Breakdown Structure

IT Project
Business
Technical
Organizational
Project Management
Competitors
Hardware
Executive support
Estimates
Suppliers
Software
User support
Communication
Cash flow
Network
Team support
Resources
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Table 11-4. Potential Negative Risk Conditions Associated With Each Knowledge Area
Knowledge Area Integration Scope Time Cost Quality Risk Conditions Inadequate planning; poor resource allocation; poor integration management; lack of post-project review Poor definition of scope or work packages; incomplete definition of quality requirements; inadequate scope control Errors in estimating time or resource availability; poor allocation and management of float; early release of competitive products Estimating errors; inadequate productivity, cost, change, or contingency control; poor maintenance, security, purchasing, etc. Poor attitude toward quality; substandard design/materials/workmanship; inadequate quality assurance program Poor conflict management; poor project organization and definition of responsibilities; absence of leadership Carelessness in planning or communicating; lack of consultation with key stakeholders Ignoring risk; unclear assignment of risk; poor insurance management Unenforceable conditions or contract clauses; adversarial relations
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Human Resources Communications Risk Procurement
Risk Identification
Risk identification is the process of understanding what potential events might hurt or enhance a particular project. Risk identification tools and techniques include:
Brainstorming
The Delphi Technique Interviewing SWOT analysis
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Brainstorming
Brainstorming is a technique by which a group attempts to generate ideas or find a solution for a specific problem by amassing ideas spontaneously and without judgment. An experienced facilitator should run the brainstorming session. Be careful not to overuse or misuse brainstorming.
Psychology literature shows that individuals produce a greater number of ideas working alone than they do through brainstorming in small, face-to-face groups. Group effects often inhibit idea generation.
Delphi Technique
The Delphi Technique is used to derive a consensus among a panel of experts who make predictions about future developments. Provides independent and anonymous input regarding future events. Uses repeated rounds of questioning and written responses and avoids the biasing effects possible in oral methods, such as brainstorming.
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Interviewing
Interviewing is a fact-finding technique for collecting information in face-to-face, phone, e-mail, or instantmessaging discussions. Interviewing people with similar project experience is an important tool for identifying potential risks.
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SWOT Analysis
SWOT analysis (strengths, weaknesses, opportunities, and threats) can also be used during risk identification. Helps identify the broad negative and positive risks that apply to a project.
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Risk Register
The main output of the risk identification process is a list of identified risks and other information needed to begin creating a risk register. A risk register is:
A document that contains the results of various risk management processes and that is often displayed in a table or spreadsheet format. A tool for documenting potential risk events and related information.
Risk events refer to specific, uncertain events that may occur to the detriment or enhancement of the project.
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Risk Register Contents

An identification number for each risk event. A rank for each risk event. The name of each risk event. A description of each risk event. The category under which each risk event falls. The root cause of each risk.
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Risk Register Contents (contd)

Triggers for each risk; triggers are indicators or symptoms of actual risk events. Potential responses to each risk. The risk owner or person who will own or take responsibility for each risk. The probability and impact of each risk occurring. The status of each risk.
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Table 11-5. Sample Risk Register

No.
R44
Rank
1
Risk
Description
Category
Root Cause
Triggers
Potential Responses
Risk Owner
Probability
Impact
Status
R21
R7
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Qualitative Risk Analysis

Assess the likelihood and impact of identified risks to determine their magnitude and priority. Risk quantification tools and techniques include:
Probability/impact matrixes The Top Ten Risk Item Tracking Expert judgment
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Probability/Impact Matrix
A probability/impact matrix or chart lists the relative probability of a risk occurring on one side of a matrix or axis on a chart and the relative impact of the risk occurring on the other. List the risks and then label each one as high, medium, or low in terms of its probability of occurrence and its impact if it did occur. Can also calculate risk factors:
Numbers that represent the overall risk of specific events based on their probability of occurring and the consequences to the project if they do occur.
Figure 11-4. Sample Probability/Impact Matrix
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Table 11-6. Sample Probability/Impact Matrix for Qualitative Risk Assessment
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Figure 11-5. Chart Showing High-, Medium-, and Low-Risk Technologies
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Top Ten Risk Item Tracking

Top Ten Risk Item Tracking is a qualitative risk analysis tool that helps to identify risks and maintain an awareness of risks throughout the life of a project. Establish a periodic review of the top ten project risk items. List the current ranking, previous ranking, number of times the risk appears on the list over a period of time, and a summary of progress made in resolving the risk item.
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Table 11-7. Example of Top Ten Risk Item Tracking

Monthly Ranking Risk Item Inadequate planning Poor definition of scope Absence of leadership This Month 1 2 Last Month 2 3 Number Risk Resolution of Months Progress 4 3 Working on revising the entire project plan Holding meetings with project customer and sponsor to clarify scope Just assigned a new project manager to lead the project after old one quit Revising cost estimates Revising schedule estimates
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Poor cost estimates Poor time estimates
4 5
4 5
3 3
Expert Judgment
Many organizations rely on the intuitive feelings and past experience of experts to help identify potential project risks. Experts can categorize risks as high, medium, or low with or without more sophisticated techniques. Can also help create and monitor a watch list, a list of risks that are low priority, but are still identified as potential risks.
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Quantitative Risk Analysis

Often follows qualitative risk analysis, but both can be done together. Large, complex projects involving leading edge technologies often require extensive quantitative risk analysis. Main techniques include:
Decision tree analysis Simulation Sensitivity analysis
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Decision Trees and Expected Monetary Value (EMV)

A decision tree is a diagramming analysis technique used to help select the best course of action in situations in which future outcomes are uncertain. Estimated monetary value (EMV) is the product of a risk event probability and the risk events monetary value. You can draw a decision tree to help find the EMV.
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Figure 11-6. Expected Monetary Value (EMV) Example
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Simulation
Simulation uses a representation or model of a system to analyze the expected behavior or performance of the system. Monte Carlo analysis simulates a models outcome many times to provide a statistical distribution of the calculated results. To use a Monte Carlo simulation, you must have three estimates (most likely, pessimistic, and optimistic) plus an estimate of the likelihood of the estimate being between the most likely and optimistic values.
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Steps of a Monte Carlo Analysis

1. Assess the range for the variables being considered. 2. Determine the probability distribution of each variable. 3. For each variable, select a random value based on the probability distribution. 4. Run a deterministic analysis or one pass through the model. 5. Repeat steps 3 and 4 many times to obtain the probability distribution of the models results.
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Figure 11-7. Sample Monte Carlo Simulation Results for Project Schedule
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What Went Right?

A large aerospace company used Monte Carlo simulation to help quantify risks on several advanceddesign engineering projects, such as the National Aerospace Plan (NASP). The results of the simulation were used to determine how the company would invest its internal research and development funds. Although the NASP project was terminated, the resulting research has helped develop more advanced materials and propulsion systems used on many modern aircraft.
Sensitivity Analysis
Sensitivity analysis is a technique used to show the effects of changing one or more variables on an outcome. For example, many people use it to determine what the monthly payments for a loan will be given different interest rates or periods of the loan, or for determining break-even points based on different assumptions. Spreadsheet software, such as Excel, is a common tool for performing sensitivity analysis.
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Figure 11-8. Sample Sensitivity Analysis for Determining Break-Even Point
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Risk Response Planning

After identifying and quantifying risks, you must decide how to respond to them. Four main response strategies for negative risks:
Risk avoidance Risk acceptance Risk transference Risk mitigation
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Table 11-8. General Risk Mitigation Strategies for Technical, Cost, and Schedule Risks
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Response Strategies for Positive Risks

Risk exploitation Risk sharing Risk enhancement Risk acceptance
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Residual and Secondary Risks

Its also important to identify residual and secondary risks. Residual risks are risks that remain after all of the response strategies have been implemented. Secondary risks are a direct result of implementing a risk response.
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Media Snapshot
A highly publicized example of a risk response to corporate financial scandals, such as those affecting Enron, Arthur Andersen, and WorldCom, was legal action. The Sarbanes-Oxley Act of 2002 is considered the most significant change to federal securities laws in the United States since the New Deal. This Act has caused many organizations to initiate projects and other actions to avoid litigation.*
*Iosub, John C., What the Sarbanes-Oxley Act Means for IT Managers, TechRepublic, (March 19, 2003) (http://techrepublic.com.com/5100-6313-5034345.html).
Risk Monitoring and Control

Involves executing the risk management process to respond to risk events. Workarounds are unplanned responses to risk events that must be done when there are no contingency plans. Main outputs of risk monitoring and control are:
Requested changes. Recommended corrective and preventive actions. Updates to the risk register, project management plan, and organizational process assets.
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Using Software to Assist in Project Risk Management

Risk registers can be created in a simple Word or Excel file or as part of a database. More sophisticated risk management software, such as Monte Carlo simulation tools, help in analyzing project risks. The PMI Risk Specific Interest Groups Web site at www.risksig.com has a detailed list of software products to assist in risk management.
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Results of Good Project Risk Management

Unlike crisis management, good project risk management often goes unnoticed. Well-run projects appear to be almost effortless, but a lot of work goes into running a project well. Project managers should strive to make their jobs look easy to reflect the results of well-run projects.
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Chapter Summary
Project risk management is the art and science of identifying, analyzing, and responding to risk throughout the life of a project and in the best interests of meeting project objectives. Main processes include:
Risk management planning Risk identification Qualitative risk analysis Quantitative risk analysis Risk response planning Risk monitoring and control
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Chapter 11: Project Risk Management

Information Technology Project Management, Fourth Edition

Information Technology Project Management, Fourth Edition

Learning Objectives (contd)

Information Technology Project Management, Fourth Edition

Learning Objectives (contd)

Describe how software can assist in project risk management.

Information Technology Project Management, Fourth Edition

The Importance of Project Risk Management

Information Technology Project Management, Fourth Edition

Research Shows Need to Improve Project Risk Management

5 = HIGHEST MATURITY RATING

Knowledge Area Scope Time Cost

Figure 11-1. Benefits from Software Risk Management Practices*

Risk Can Be Positive

Information Technology Project Management, Fourth Edition

Figure 11-2. Risk Utility Function and Risk Preference

Information Technology Project Management, Fourth Edition

Project Risk Management Processes

Information Technology Project Management, Fourth Edition

Project Risk Management Processes (contd)

Risk Management Planning

Information Technology Project Management, Fourth Edition

Table 11-2. Topics Addressed in a Risk Management Plan

Contingency and Fallback Plans, Contingency Reserves

Common Sources of Risk in Information Technology Projects

Information Technology Project Management, Fourth Edition

Table 11-3. Information Technology Success Potential Scoring Sheet

Relative Importance 19 16 15 11 10 9 8 6 3 3 100

Broad Categories of Risk

Information Technology Project Management, Fourth Edition

Risk Breakdown Structure

Information Technology Project Management, Fourth Edition

Figure 11-3. Sample Risk Breakdown Structure

Information Technology Project Management, Fourth Edition

Human Resources Communications Risk Procurement

Information Technology Project Management, Fourth Edition

Information Technology Project Management, Fourth Edition

Information Technology Project Management, Fourth Edition

Information Technology Project Management, Fourth Edition

Information Technology Project Management, Fourth Edition

Information Technology Project Management, Fourth Edition

Risk Register Contents

Information Technology Project Management, Fourth Edition

Risk Register Contents (contd)

Information Technology Project Management, Fourth Edition

Table 11-5. Sample Risk Register

Information Technology Project Management, Fourth Edition

Qualitative Risk Analysis

Information Technology Project Management, Fourth Edition

Figure 11-4. Sample Probability/Impact Matrix

Information Technology Project Management, Fourth Edition

Table 11-6. Sample Probability/Impact Matrix for Qualitative Risk Assessment

Information Technology Project Management, Fourth Edition

Figure 11-5. Chart Showing High-, Medium-, and Low-Risk Technologies

Information Technology Project Management, Fourth Edition

Top Ten Risk Item Tracking

Information Technology Project Management, Fourth Edition

Table 11-7. Example of Top Ten Risk Item Tracking

Poor cost estimates Poor time estimates

Information Technology Project Management, Fourth Edition

Information Technology Project Management, Fourth Edition